RCN Corporation (RCNI) Could Double

June 23, 2008 9:18 AM EDT

This week Barron's wrote a positive piece on the cable operator, RCN Corporation (Nasdaq: RCNI). RCN claims to have pioneered the "triple-play" concept (video, Internet, phone services), and is holding its own against large players such as Time Warner Cable (NYSE: TWC), Comcast (Nasdaq: CMCSA) and Verizon (NYSE: VZ).

RCN Corporation has 421,000 customers and annual sales of $636 million, RCN is rather small when compared to Comcast, which has 24.7 million subscribers and annual sales of $30.9 billion, or Time Warner, with 14.7 million customers and $16.0 billion in yearly sales.

RCN CEO Peter D. Aquino told Barron's in response to its small size, "We believe we have established a profitable niche by offering more appealing packages and pricing, providing better service and standing as an alternative for customers who don't like dealing with the big guys like Comcast or Time Warner."

Because RCN is smaller, it's forced to pay more to carry cable channels than do its larger rivals, but it has been quite nimble to bundle voice, data and video cheaper than the competition. In addition, RCN's customers, on average, consume more than two of the three offered services, paying $109 a month -- the highest figure in the industry.

RCN network is similar to the fiberoptic system that Verizon is building nationwide under the FiOS brand name, which is faster than the older copper networks. With RCN's advanced network, RCN was able to win big contracts in Manhattan. It wired Time Warner's headquarters on Columbus Circle, including signing up the anchor tenants as well. Also, other New York clients include General Motors' New York office, New York Stock Exchange and New York University among its 100,0000 customers in New York.

RCN has yet to post net income since emerging from bankruptcy. However, the revenue line is growing nicely--jumping 9%, to $636 million, in 2007 and, management says, could hit $740 million this year. RCN stock is trading at only 5.7 times 2008's estimated cash flow, which many considers relatively inexpensive, compared with other cable operators, such as Comcast, which is selling at about 7.2 times expected cash flow, and Time Warner, which is changing hands at 6.6 times.

Barron's noted analysts and money managers who've attempted a sum-of-the-parts valuation believe the stock is worth "north of 20."

To summarize, Barron's think RCN's stock could rise more than 50% over the next year, and perhaps double in a takeover scenario by its larger competitors. For now, Aquino will continue to execute the business and if a takeover happens, then hopefully his shareholders will be handsomely rewarded.

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